THE  INVESTMENT 
RATIONAL 


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THE  INVESTMENT 
RATIONAL 


COPYRIGHT  1920 
BY  EARL  G.  MANNING 
OF  BOSTON 


LIFE  INSURANCE 
TO  MEET  ESTATE  TAXES 
AND  EXPENSES 

In  the  days  of  ten  or  a dozen  years  ago,  when  there  were  no  inheritance 
or  estate  taxes,  there  was  an  honest  feeling  among  men  of  means  that  they 
could  do  as  well,  or  better,  with  their  money  as  to  invest  it  in  life  insurance. 

This  feeling  has  nearly  disappeared  since  the  Federal  Government  and 
most  of  the  States  have  imposed  such  severe  taxes  on  estates  when  they  pass 
to  proper  legatees. 

Five  estates  have  recently  been  probated  in  Massachusetts  and  the  fig- 
ures are  very  interesting: 

Total  value  $789,000 

Total  taxes  and  expenses  58,000  or  7J^% 

Total  cash  on  hand  to  meet  expenses  25,111  “ 3}^% 

The  difference  between  $58,000  and  $25,111,  or  $32,889,  represents  the 
amount  of  securities  that  had  to  be  sold  to  meet  the  taxes  and  expenses. 
Furthermore,  the  best  securities  in  the  whole  estates  are  usually  the  ones 
which  the  executor  elects  to  sell  because  there  would  be  the  least  resultant 
sacrifice  to  the  estate.  In  other  words  — 

INHERITANCE  TAXES  ARE  A LIEN 
ON  THE  BEST  SECURITIES  IN  AN 
ESTATE,  BECAUSE  THE  TAXES  HAVE 
TO  BE  PAID  IMMEDIATELY. 

Life  Insurance  is  the  only  known  security  which  does  not  shrink  in 
value;  it  is  always  worth  100  cents  on  a dollar:  It  is  entirely  logical , there- 
fore, that  a proper  amount  of  life  insurance  be  taken  by  a man  of  means  to 
meet  the  expenses  which  are  known  and  can  be  figured  out  in  the  settling  oj 
his  estate . 


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THE  INVESTMENT  RATIONAL 


LIFE  INSURANCE  TO  INCREASE  AN  ESTATE 

Let  us  assume  a not  unusual  situation:  A man  and  a wife  and  three 
children.  He  has  a $100,000  estate  and  wishes  to  provide  life  incomes  for 
his  wife  and  each  of  his  children. 

Under  normal  circumstances,  it  would  take  many  years  to  increase  the 
$100,000  estate  to  large  enough  proportions  so  that  each  beneficiary  would 
receive  an  income  for  life  of,  say  $2,500  a year  — it  would  mean  doubling 
the  estate. 

The  price  of  three  or  four  bonds  a year  deposited  with  a life  insurance 
company  would  immediately  increase  the  estate  by  $100,000  to  $200,000  and 
would  establish  the  wished-for  life  incomes  of  sufficient  size  at  once. 


Looking  at  the  transaction  from  purely  an  investment  standpoint  of 
gain  to  the  estate  including  the  gross  deposits,  the  diagram  below  shows 
what  percentage  of  increase  is  received  by  the  estate  if  the  insured  dies  before 
the  end  of  his  expectation  of  life. 

These  percentages  are  greatly  increased  by  the  return  of  dividends  or 
refunds  which  occur  annually.  The  experience  of  most  of  the  better  man- 
aged companies  has  shown  that  between  15  and  25%  of  the  gross  premiums 
paid  in  twenty  years  have  been  refunded. 

The  percentages  would  be  manifestly  larger  if  the  insurance  was  taken 
on  a man  less  than  age  50,  for  his  premium  would  be  considerably  lower 
than  $4,400  a year. 


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THE  INVESTMENT  RATIONAL 


Life  Insurance  up  to  February,  1919,  was  not  subject  to  any  Inheritance 
Taxes,  but  the  law  that  was  passed  at  that  time  has  imposed  a tax,  when 
made  payable  to  individual  beneficiaries,  on  anything  over  $40,000.  This 
ruling  was  modified  in  February , 1919,  as  it  provides  that  when  the  in- 
surance is  paid  for  by  anyone  other  than  the  insured  there  is  no  tax  to  the 
insured's  estate  no  matter  what  the  amount.  When  Life  Insurance  is  made 
payable  direct  to  the  estate  there  is  no  inheritance  tax  exemption  whatso- 
ever, as  it  merges  with  the  gross  assets  of  the  estate.  In  order,  then,  that 
the  fullest  amount  of  exemption  shall  be  obtained  it  is  perhaps  wise  to 
take  this  into  consideration  and  have  the  policies  drawn  to  individual 
beneficiaries. 

Irrespective  of  the  fact  that  Life  Insurance  itself  is  taxed  over  $40,000, 
it  still  remains  the  only  unshrinkable  security  with  which  to  pay  Inheritance 
Taxes.  It  is  possible  to  figure  what  the  taxes  on  the  insurance  will  be,  so 
that  an  adequate  amount  can  be  purchased  to  provide  for  this  factor  as  well 

The  diagram  below  shows  the  percentages  which  $100,000  of  30-year 
endowment  insurance  will  return  to  an  estate,  when  taken  on  a man  age  30. 

The  increase  in  cost  between  Ordinary  Life  policy  and  a 30 -year  en- 
dowment, at  the  age  of  30,  is  barely  $5.00  per  thousand  per  year.  The  idea 
that  a man  will  ultimately  receive  the  money  himself,  if  he  lives  to  age  60, 
very  often  appeals.  At  maturity  it  may  be  held  in  trust  by  the  company  un- 
til death  occurs,  returning  in  the  meanwhile  approximately  4j^  interest. 


Under  this  plan,  the  most  that  could  ever  be  paid  during  the  thirty 
years  for  this  $100,000  insurance  is  $90,153.  If  the  dividends,  which  the 
companies  may  return  in  the  next  thirty  years,  are  anywhere  near  like  what 
they  have  been  in  the  past  thirty  years  it  would  not  be  an  unusual  occur- 
rence for  this  $100,000  of  insurance  to  be  increased  to  approximately  $125,- 
000  or  $130,000. 


